[Federal Register Volume 89, Number 211 (Thursday, October 31, 2024)]
[Notices]
[Pages 86868-86879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25322]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101444; File No. SR-OCC-2024-015]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning Modifications to
Its Governance Documents To Align With Recently Adopted SEC Governance
Rules
October 25, 2024
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on October 21, 2024, The Options Clearing
Corporation (``OCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by OCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would make modifications to its
governance documents, including OCC's charters, Fitness Standards, and
Third-Party Risk Management Framework, as part of an effort to achieve
compliance with the recently adopted governance requirements \3\ by the
Commission for clearing agencies registered with the Commission
(``registered clearing agencies'') that became effective on February 5,
2024. Registered clearing agencies, like OCC, must comply with most of
the governance requirements by December 5, 2024. However, the
governance requirement for independent directors, as described in
further detail below, has a compliance date of December 5, 2025.
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\3\ See Securities Exchange Act Release No. 98959 (Dec. 5,
2023), 88 FR 84454 (Dec. 5, 2023) (File No. S7-21-22) (``SEC
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf.
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In addition to the proposed modifications that OCC believes are
necessary to comply with the recently adopted governance requirements,
OCC is also including proposed modifications to its governance
documents that reflect changes identified during OCC's annual review
process. The proposed changes related to the governance requirements
and the proposed changes related to OCC's annual review process are
differentiated throughout this filing and described in further detail
below. For clarification, OCC's Board of Directors Charter and
Corporate Governance Principles (``Board Charter''), Governance and
Nominating Committee (``GNC'') Charter, Risk Committee Charter,
Technology Committee Charter, Compensation and Performance Committee
(``CPC'') Charter, Regulatory Committee Charter, Audit Committee
Charter, Fitness Standards, Third-Party Risk Management Framework, and
Article III of OCC's By-Laws are collectively referred to in this
proposed rule change as OCC's ``governance documents.''
The proposed changes to OCC's governance documents are contained in
Exhibits 5A through 5J, respectively, to File No. SR-OCC-2024-015.
Material proposed to be added is marked by underlining and material
proposed to be deleted is marked with strikethrough text.
All terms with initial capitalization that are not otherwise
defined herein have the same meaning as set forth in the OCC By-Laws
and Rules.\4\
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\4\ OCC's By-Laws and Rules can be found on OCC's public
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
OCC is the sole clearing agency registered with the Commission for
standardized equity options listed on national securities exchanges.
OCC operates under the jurisdiction of both the Commission and the
Commodity Futures Trading Commission (``CFTC''). OCC also clears and
settles certain stock loan transactions and transactions in futures and
options on futures. In connection with its clearance and settlement of
transactions in securities, OCC is a ``covered clearing agency'' \5\
regulated by the Commission. In connection with its clearance and
settlement activities for transactions in futures and options on
futures, OCC is a derivatives clearing organization (``DCO'') regulated
by the CFTC. OCC is also designated as a systemically important
financial market utility (``SIFMU'') by the Financial Stability
Oversight Council pursuant to Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'').
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\5\ The term ``covered clearing agency'' is defined in Exchange
Act Rule 17Ad-22(a)(5) to mean ``a registered clearing agency that
provides the services of a central counterparty or central
securities depository.'' 17 CFR 240.17Ad-22(a)(5).
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As an SEC registered clearing agency and a CFTC registered DCO, OCC
is already subject to regulations that impose requirements on its
governance structure. For example, the Exchange Act requires OCC's
rules to assure a fair representation of its shareholders and Clearing
Members in the selection of its directors and the administration of its
affairs.\6\ In addition, SEC rules, among other things, require OCC to
have governance arrangements that are clear and transparent and that
provide risk management and internal audit personnel with a direct
reporting line to, and oversight by, a risk management committee and an
independent audit committee of the Board.\7\ In July of 2023, the CFTC
also finalized new governance requirements for DCOs.\8\ Those
requirements, among other
[[Page 86869]]
things, require the establishment of one or more market participant
risk advisory working groups as a forum to seek risk-based input from a
broad array of market participants. OCC previously filed a proposed
rule change with the SEC to implement changes to address these
requirements.\9\
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\6\ 17 U.S.C. 78q-1(b)(3)(C).
\7\ 17 CFR 240.17Ad-(22)(e)(2)(i) and (3)(iv).
\8\ See 88 FR 44675 (July 13, 2023) (``CFTC Adopting Release''),
https://www.govinfo.gov/content/pkg/FR-2023-07-13/pdf/2023-14361.pdf.
\9\ See Securities Exchange Act Release No. 100194 (May 21,
2024), 89 FR 46205 (May 28, 2024) (SR-OCC-2024-005).
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OCC currently maintains a robust governance structure that is
designed to comply with existing requirements of the Commission and
CFTC. Recently, the Commission adopted new regulations regarding
governance requirements for registered clearing agencies (``SEC
Governance Rules'') that supplement the existing governance
requirements applicable to OCC as a registered clearing agency.\10\ The
SEC Governance Rules require, among other things, that registered
clearing agencies:
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\10\ See SEC Adopting Release, 88 FR 84454.
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(i) Establish requirements that a majority of the members of the
board of directors of the registered clearing agency be independent
directors, as defined in 17Ad-25(a), and that each registered clearing
agency consider all the relevant facts and circumstances to
affirmatively determine that a director does not have a material
relationship with the registered clearing agency or an affiliate of the
registered clearing agency that would preclude services as an
independent director.\11\
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\11\ 17 CFR 240.17Ad-25(b)(1), (2).
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(ii) Establish a nominating committee and a written evaluation
process whereby such committee evaluates nominees for service as
directors and evaluating the independence of nominees and
directors,\12\ and require that a majority of the directors on the
nominating committee be independent directors, including the chair of
the nominating committee.\13\ The fitness standards for service as a
director must be specified by the nominating committee, documented in
writing and approved by the board of directors.\14\ The nominating
committee must also document the outcome of the written evaluation
process consistent with the fitness standards required in 17Ad-
25(c)(3).\15\
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\12\ 17 CFR 240.17Ad-25(c)(1).
\13\ 17 CFR 240.17Ad-25(c)(2).
\14\ 17 CFR 240.17Ad-25(c)(3).
\15\ 17 CFR 240.17Ad-25(c)(4).
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(iii) Establish a risk management committee or committees of the
board to assist the board of directors in overseeing the risk
management of the registered clearing agency, and the membership of
each risk management committee must be re-evaluated annually and at all
times include representatives from the owners and participants of the
registered clearing agency.\16\ The risk management committee must be
able to provide a risk-based, independent, and informed opinion on all
matters presented to the committee for consideration in a manner that
supports the overall risk management, safety and efficiency of the
registered clearing agency.\17\
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\16\ 17 CFR 240.17Ad-25(d)(1).
\17\ 17 CFR 240.17Ad-25(d)(2).
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(iv) Establish composition requirements for committees that have
authority to act on behalf of the board of directors, such that the
composition of that committee must have at least the same percentage of
independent directors as is required for the board of directors.\18\
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\18\ 17 CFR 240.17Ad-25(e).
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(v) Maintain policies and procedures to identify and document
existing or potential conflicts of interest in the decision-making
process of the clearing agency involving directors or senior managers
of the registered clearing agency and mitigate or eliminate and
document the mitigation or elimination of such conflicts of
interest.\19\
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\19\ 17 CFR 240.17Ad-25(g)(1)(2).
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(vi) Maintain policies and procedures reasonably designed to
require a director to document and inform the registered clearing
agency promptly of the existence of any relationship or interest that
reasonably could affect the independent judgment or decision-making of
the director.\20\
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\20\ 17 CFR 240.17Ad-25(h).
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(vii) Maintain policies and procedures reasonably designed to: (1)
require senior management to evaluate and document the risks related to
an agreement with a service provider for core services, including under
changes to circumstances and potential disruptions, and whether the
risks can be managed in a manner consistent with the clearing agency's
risk management framework; (2) require senior management to submit to
the board of directors for review and approval any agreement that would
establish a relationship with a service provider for core services,
along with the risk evaluation; (3) require senior management to be
responsible for establishing the policies and procedures that govern
relationships and manage risks related to such agreements with service
providers for core services and require the board of directors to be
responsible for reviewing and approving such policies and procedures;
and (4) require senior management to perform ongoing monitoring of the
relationship, and report to the board of directors for its evaluation
of any action taken by senior management to remedy significant
deterioration in performance or address changing risks or material
issues identified through such monitoring; or if the risks or issues
cannot be remedied, require senior management to assess and document
weaknesses or deficiencies in the relationship with the service
provider for submission to the board of directors.\21\
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\21\ 17 CFR 240.17Ad-25(i)(1)-(4).
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(viii) Maintain policies and procedures for the board to solicit,
consider, and document its consideration of the views of participants
and other relevant stakeholders of the registered clearing agency
regarding material developments in the registered clearing agency's
risk management and operations.\22\
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\22\ 17 CFR 240.17Ad-25(j).
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OCC already maintains risk and nominating committees of the Board,
fitness standards for directors, and written procedures for directors
to identify and disclose conflicts of interest. However, to implement a
compliant approach with those requirements for which OCC believes
changes will be necessary, OCC is proposing to revise its governance
documents such that the documents set clear and transparent governance
standards and provide a framework for compliance. OCC's proposed
changes to its governance documents establish requirements that
provide: (i) OCC's Board be comprised of a majority of independent
directors; (ii) each Board-level committee that has delegated authority
from the Board be comprised of a majority of independent directors;
(iii) OCC's existing Risk Committee and GNC align with the related
requirements in the SEC Governance Rules regarding the responsibilities
and composition of the committees; (iv) OCC's Fitness Standards align
with the related requirements in the SEC Governance Rules for
directors; and (v) OCC's Board Charter and Third-Party Risk Management
Framework incorporate the requirements in the SEC Governance Rules
regarding review, approval, and monitoring of agreements with service
providers for core services. OCC also plans to revise other internal
policies and procedures to align with the remaining requirements in the
SEC Governance Rules that include, among other things, the
identification and analysis of directors for independence, and the
management of risks from relationships with service providers for
[[Page 86870]]
core services.\23\ OCC believes that the proposed changes will allow
OCC to appropriately comply with the SEC Governance Rules by including
the proposed provisions in OCC's governance documents.
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\23\ OCC has included as confidential Exhibits 3A through 3E to
File No SR-OCC-2024-015 the other internal policies and procedures
referenced here.
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1. Purpose
The purpose of this proposed rule change by OCC is to modify its
governance documents to implement changes that are designed to comply
with requirements in the SEC Governance Rules, which are found in 17
CFR 240.17Ad-25 (``Rule 17Ad-25'').\24\ In the Commission's adopting
release, the Commission clarifies that it is adopting new rules to
improve the governance of registered clearing agencies by reducing the
likelihood that conflicts of interest may influence a board of
directors or equivalent governing body of a registered clearing
agency.\25\ In addition, the SEC Governance Rules identify certain
responsibilities of a clearing agency board, increase transparency into
board governance, and, more generally, improve the alignment of
incentives among owners and participants of a registered clearing
agency.\26\
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\24\ 17 CFR 240.17Ad-25.
\25\ See SEC Adopting Release at 84454.
\26\ Id.
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In addition to the proposed rule changes necessary to comply with
the SEC Governance Rules, OCC proposes a series of rule changes
identified during OCC's annual review process. While these proposed
changes to OCC's governance documents are described in further detail
below, thematically, they consist of the following:
i. Proposed changes in effort to achieve compliance with the SEC
Governance Rules:
Revisions to OCC's Board Charter to specify: (i) a
majority of OCC's Board be comprised of independent directors (ii) that
each Board-level committee established by the Board and that has
delegated authority from the Board be comprised of a majority of
independent directors, and (iii) the Board's oversight role of senior
management as it relates to management of risks from relationships with
service providers for core services.
Revisions to the charters for OCC's six Board-level
committees that have delegated authority from the Board of Directors,
including the GNC Charter, Risk Committee Charter, Technology Committee
Charter, CPC Charter, Regulatory Committee Charter, and Audit Committee
Charter, to specify that each committee be comprised of a majority of
directors who are independent.
Revisions to OCC's GNC Charter to specify the
responsibilities of the GNC, including that: (i) the GNC specify
fitness standards for serving as a director that are documented in
writing and approved by the Board; (ii) the GNC maintain a written
evaluation process to evaluate all nominees for potential service as
directors and evaluate the independence of nominees and directors for
consistency with regulatory requirements; and (iii) the outcome of that
evaluation process be documented consistent with regulatory
requirements.
Revisions to OCC's Risk Committee Charter to specify that
in making their nominations for the Risk Committee, the GNC and the
Board will take into consideration the ability of the Risk Committee to
provide a risk-based, independent, and informed opinion on all matters
presented to the Risk Committee for consideration.
Revisions to OCC's Fitness Standards to include the
consideration of: (i) whether the nominee would help demonstrate that
the Board, taken as a whole, has a diversity of skills, knowledge,
experience, and perspectives, and (ii) the views of other stakeholders,
aside from owners and participants, who may be affected by decisions of
OCC's Board.
Revisions to OCC's Third-Party Risk Management Framework
to incorporate the requirements in the SEC Governance Rules related to
management of risks from relationships with service providers for core
services. This includes requiring senior management to: (i) evaluate
and document risks related to an agreement with a service provider for
core services; (ii) submit to the Board for review and approval any
agreement establishing a relationship with a service provider for core
services along with a risk evaluation; and (iii) perform ongoing
monitoring of service providers for core services and report to the
Board any action taken by senior management to remedy significant
deterioration in performance, address material issues, and assess and
document weaknesses or deficiencies that cannot be remedied.
ii. Proposed changes identified during OCC's annual review process:
Revisions to OCC's Board Charter to provide specific
requirements used to determine what constitutes a Public Director.
Revisions to Article III, Section 6A of OCC's By-Laws to
incorporate the proposed changes to OCC's definition of a Public
Director.
Revisions to OCC's Fitness Standards to incorporate the
proposed changes to OCC's definition of a Public Director.
Revisions to OCC's CPC Charter to expand the description
of the role of the CPC as it relates to oversight of the development
and administration of OCC's Human Resources programs.
Revisions to OCC's Regulatory Charter to incorporate minor
grammatical updates.
Revisions to OCC's Third-Party Risk Management Framework
to: (i) define ``Exchange Relationship'' as it relates to risks arising
from third-party relationships; (ii) update the description of
``Information Technology and Security risks and ``Legal and Regulatory
risks'' to align with current practice; (iii) update the name and
abbreviation of OCC's working group to reflect the combination of two
pre-existing working groups; and (iv) provide additional clarifying
information on how OCC engages and manages vendor relationships.
OCC's Existing Governance Structure
Currently, OCC's Board of Directors is composed of Public
Directors,\27\ Exchange Directors,\28\ Member Directors,\29\ and a
Management Director.\30\ OCC's current Board is comprised of up to
twenty-one directors total, including nine Member Directors, up to six
Public Directors, five Exchange Directors, and one Management Director.
In this way, the directors that serve on the Board represent a range of
different stakeholders from the markets that OCC serves. OCC's Board
already reviews the independence of each director through its Director
Questionnaire, which is used to facilitate the analysis of whether a
director appropriately can be considered independent, as defined by the
Board, and to identify and document any potential conflicts of
interest. OCC's current processes require, among other
[[Page 86871]]
things, an annual attestation of the information included in the
Director Questionnaire. OCC also maintains a Code of Conduct for OCC
Directors that requires that directors update the necessary documents
and information if there are any changes.
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\27\ Terms regarding service by Public Directors are set forth
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 6A; Fitness Standards at ``Additional
Criteria for the Public Directors,'' See supra note 4.
\28\ Terms regarding service by Exchange Directors are set forth
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 6; Fitness Standards at ``Additional
Criteria for Exchange Directors'' Id.
\29\ Terms regarding service by Member Directors are set forth
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 2; Fitness Standards at ``Additional
Criteria for Member Directors'' Id.
\30\ Terms regarding service by the Management Director are set
forth in OCC's By-Laws. For example, the Management Director must be
an OCC employee. See e.g., OCC By-Laws Article III, Section 7 Id.
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OCC also already maintains a Board-level Risk Committee and GNC, as
required by the SEC Governance Rules. In addition to the Risk Committee
and GNC, OCC's Board oversees four other Board-level committees that
are comprised of certain Board directors and that assist the Board in
carrying out its supervisory role. The other committees include the
Regulatory Committee, the Technology Committee, the Audit Committee,
and the CPC. In connection with OCC's existing Board and Board
committee structure, OCC maintains charters for the Board and all
Board-level committees, and Fitness Standards for Directors, Clearing
Members and Others (``Fitness Standards''). The charters, Fitness
Standards, and Code of Conduct are all publicly available on OCC's
website.\31\
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\31\ See Board Charters, Board Committee Charters and Other
Governance Documents, available at https://www.theocc.com/company-information/documents-and-archives/board-charters.
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In addition to maintaining a Board-level Risk Committee, OCC also
maintains a non-Board-level risk management committee. This non-Board-
level risk management committee is a subset of OCC's existing Financial
Risk Advisory Counsil (``FRAC'') and is comprised of clearing members
and customers of clearing members. As required by the recently adopted
CFTC governance rules,\32\ OCC consults with this non-Board-level risk
committee on all matters that could materially affect the risk profile
of OCC.\33\ As such, OCC believes this also satisfies the SEC
Governance Rules requirement for the board of directors to solicit and
consider viewpoints of participants and other relevant stakeholders
regarding material developments in its risk management and
operations.\34\
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\32\ See 88 FR 44675 (July 13, 2023) (``CFTC Adopting
Release''), https://www.govinfo.gov/content/pkg/FR-2023-07-13/pdf/2023-14361.pdf.
\33\ OCC's FRAC Guiding Principles is included as confidential
Exhibit 3F to File No. SR-OCC-2024-015, and provides more
information on the responsibilities and composition of the non-
Board-level risk management committee.
\34\ 17 CFR 240.17Ad-25(j).
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Lastly, OCC already maintains a Third-Party Risk Management
Framework that is reviewed and approved at least annually by OCC's Risk
Committee and Board. OCC's Third-Party Risk Management Framework
outlines OCC's approach to identify, measure, monitor, and manage risks
arising from third-party relationships, consistent with certain
requirements in the SEC Governance Rules that require senior management
to be responsible for establishing policies and procedures that govern
relationships and manage risks related to agreements with service
providers for core services, and that require the board of directors to
review and approve such policies and procedures.\35\
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\35\ 17 CFR 240.17Ad-25(i)(3).
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Proposed Changes to OCC's Board Charter
The Mission of the Board
The SEC Governance Rules require the Board to be comprised of a
majority of ``independent directors'' as that term is defined in the
SEC Governance Rules.\36\ To align with this requirement, OCC proposes
to modify its Board Charter to clarify that a majority of directors,
rather than a substantial portion of directors, be independent
directors, as defined by the SEC Governance Rules \37\ and the
judgement of the Board. Specifically, OCC's proposed changes to the
Board Charter would provide that as part of the Board's mission, the
Board fulfills its oversight role by ensuring that at least a majority
of the directors on the Board are independent as determined by the
Board and in accordance with Securities and Exchange Commission Rule
17Ad-25(b) adopted on December 5, 2023.\38\ OCC's proposed changes
expand the requirement that all Board-level committees, not just the
Audit Committee, be comprised of independent directors. Specifically,
OCC's proposed changes eliminate the reference that only the Audit
Committee of the Board be comprised of independent directors and
provide that at least a majority of the directors on each Board-level
committee be comprised of independent directors.
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\36\ 17 CFR 240.17Ad-25(a).
\37\ 17 CFR 240.17Ad-25(b).
\38\ Id.
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The SEC Governance Rules also require OCC to have written policies
and procedures designed to address certain aspects of risk management
in connection with relationships with service providers for core
clearing agency services, and require senior management to be
responsible for establishing the policies and procedures and the Board
to be responsible for reviewing and approving such policies and
procedures.\39\ The SEC Governance Rules also require senior management
to perform ongoing monitoring of the relationship with a service
provider for core services and report to the Board for its evaluation
of any action taken by senior management to remedy significant
deterioration in performance or address changing risks or material
issues identified through such monitoring.\40\ If the risks or issues
cannot be remedied, the SEC Governance Rules require that senior
management assess and document weaknesses or deficiencies in the
relationship with the service provider for submission to the Board.\41\
To align with these requirements, OCC's proposed changes to the Board
Charter would provide that as part of the Board's mission, the Board
fulfills its oversight role by overseeing service providers that
provide core services for OCC, including reviews of risk assessments
for current vendors and approving terms for new vendors that will
provide core services for OCC. OCC's proposed changes would also
provide that the Board fulfills its oversight role by overseeing senior
management's review and approval of an agreement that establishes a
relationship with a service provider for core services, and overseeing
senior management's risk assessment for such agreements. In addition,
OCC's proposed changes provide that the Board review and approve
policies and procedures established by senior management that govern
relationships and manage risks related to agreements with service
providers for core services. Lastly, OCC's proposed changes provide
that the Board evaluate any action taken by senior management to remedy
significant deterioration in performance or address changing risks or
material issues identified through senior management's monitoring of
relationships with a service provider for core services, and oversee
senior management's assessment and document of weaknesses or
deficiencies with the service provider if such risks or issues cannot
be remedied.
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\39\ 17 CFR 240.17Ad-25(i)(2),(3).
\40\ 17 CFR 240.17Ad-25(i)(4).
\41\ Id.
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Board Issues--Size of Board; Composition
The SEC Governance Rules define independent director as ``a
director of the registered clearing agency who has no material
relationship with the registered clearing agency or any affiliate
thereof.'' \42\ The SEC Governance Rules require that the Committee
affirmatively determine and document whether a nominee or director is
appropriately categorized as an independent director, as defined in
[[Page 86872]]
the SEC Governance Rules.\43\ To align with this requirement, OCC
proposes to modify its Director Questionnaire to align OCC's analysis
of potential conflicts with the applicable regulatory requirements in
the SEC Governance Rules and facilitate the analysis of whether a
nominee or director appropriately can be considered independent.
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\42\ 17 CFR 240.17Ad-25(a).
\43\ 17 CFR 240.17Ad-25(b)(2).
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Furthermore, to reflect the definition of independent director as
defined by the SEC Governance Rules,\44\ OCC's proposed changes to the
Board Charter would also state that it is the policy of the Board that
the Board at all times reflect that a majority, rather than a
substantial portion, of directors be ``independent'' as defined by the
SEC Governance Rules and the judgment of the Board. OCC's proposed
changes remove the reference that a substantial portion of directors
must be independent ``of OCC and OCC's management.'' OCC believes these
proposed changes to the Board composition section of the Board Charter
will satisfy the independent director requirement, as defined in the
SEC Governance Rules.
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\44\ 17 CFR 240.17Ad-25(a).
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Board Issues--Selection of Exchange Directors
As described in more detail below, the SEC Governance Rules contain
several requirements related to the responsibilities of a nominating
committee.\45\ Currently, all OCC directors are subject to a standard
criterion outlined in OCC's existing Fitness Standards that is
applicable to all directors and used when determining the nomination of
a director. The SEC Governance Rules require that the nominating
committee must have a written evaluation process whereby the nominating
committee shall evaluate nominees under consideration for a
directorship and evaluate the independence of nominees and directors.
OCC's proposed changes to the Board Charter clarify this requirement
and the role of the GNC when describing the selection of Exchange
Directors. OCC's proposed changes state that as provided in the By-
Laws, each Exchange Director shall, after evaluation by the Governance
and Nominating Committee, be elected by the Equity Exchange entitled to
vote for such Exchange Director at each annual meeting of stockholders.
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\45\ 17 CFR 240.17Ad-25(c).
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Committees--Board Committees
As noted above, OCC maintains six Board-level committees including
the GNC, the Risk Committee, Technology Committee, CPC, Regulatory
Committee and Audit Committee. Subject to the direction of the Board,
all six committees are empowered to act on behalf of the Board with
respect to any matter necessary or appropriate to the accomplishment of
the purpose and responsibilities set forth in the committee charters.
The SEC Governance Rules specify that any Board committee that has the
authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself as identified
in paragraph (b)(1) of Rule 17Ad-25.\46\ To reflect this requirement,
OCC's proposed changes to its Board Charter provide that each committee
established by the Board must be comprised of a majority of directors
who are deemed independent by the Board and in accordance with the SEC
Governance Rules.
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\46\ 17 CFR 240.17Ad-25(e).
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Committees--Independence for Audit Committee Service
For clarity and consistency, OCC also proposes to add the word
``additional'' prior to the word ``independence'' when describing the
independence criteria for the Audit Committee service. This helps to
clarify that OCC maintains separate independence requirements for the
Audit Committee, which are also consistent with listed company Audit
Committee standards \47\ and are in addition to the requirements
outlined in the SEC Governance Rules.
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\47\ See Nasdaq Listing Rule 5605(c)(2) and Section 303A.06 of
NYSE Listed Company Manual.
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Proposed Changes to OCC's Board Charter and By-Laws Identified During
OCC's Annual Review Process
As part of OCC's annual review of its Board Charter, OCC is
proposing changes to its Board Charter and Article III of the By-Laws
to provide specific requirements used to determine whether an
individual director meets the definition of a Public Director. As
outlined in Article III of OCC's current By-Laws, OCC's existing Board
of Directors must be composed of nine Member Directors, up to five
Exchange directors, no less than five Public Directors, and may include
one Management Director.\48\ To account for changes in regulatory
requirements, OCC's proposed changes to the Board Charter provide that
OCC's Board must be comprised of no less than five directors who are
not an associated person or employee of (i) an entity that is
registered or exempt from registration with the Securities and Exchange
Commission or Commodity Futures Trading Commission or (ii) affiliate of
such an entity described in (i). OCC proposes to remove reference to
the language that the director must not be affiliated with any national
securities exchange, national securities association, designated
contract market, futures commission merchant, or broker or dealer in
securities.
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\48\ See supra note 4, Article III, Section I of the By-Laws.
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To incorporate these proposed changes in the definition of a Public
Director as described in OCC's Board Charter, OCC also proposes to
modify Article III, Section 6A of the By-Laws.\49\ OCC's proposed
changes to Article III, Section 6A of the By-Laws provide that prior to
each annual meeting of stockholders at which one or more Public
Directors are to be elected, the GNC shall, for each directorship among
the Public Directors to be filled at such annual meeting, nominate one
person who is not an associated person or employee of an: (i) entity
that is registered or exempt from registration with the Commission or
CFTC; or (ii) affiliate of such an entity described in (i) and submit a
list of its nominations in writing to the Board of Directors. To remain
consistent with the proposed changes in OCC's Board Charter and provide
specific requirements for Public Directors, OCC proposes to eliminate
reference to the language that the person must not be affiliated with
any national securities exchange, national securities association,
designated contract market, futures commission merchant, or broker or
dealer in securities.
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\49\ Id.
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OCC believes these proposed changes to its Board Charter and By-
Laws identified during the annual review process provide specific
requirements for how OCC determines whether a director is affiliated in
the industry and the requirements applicable to a Public Director.
Proposed Changes to OCC's GNC Charter
Purpose
The SEC Governance Rules require, among other things, that
registered clearing agencies establish a nominating committee and a
written evaluation process for evaluating board nominees and the
independence of nominees and directors and specify requirements with
respect to its composition, director fitness standards, and
documentation of
[[Page 86873]]
the outcome of the written evaluation process.\50\ As noted above, OCC
already maintains a GNC, and maintenance of OCC's existing GNC is
consistent with the requirement in the SEC Governance Rules that OCC
must have a nominating committee. OCC's existing GNC Charter provides
that the purpose of the GNC is to assist the Board in overseeing OCC's
corporate governance processes, including assessing that OCC's
governance arrangements are clear and transparent, establishing the
qualifications necessary for Board service to ensure that the Board is
able to discharge its duties and responsibilities, identifying and
recommending to the Board candidates eligible for service as Public
Directors and Member Directors, and resolving certain conflicts of
interest. To clarify the role of the GNC and more closely align with
the language in the SEC Governance Rules requirement that the
nominating committee evaluate board nominees, OCC's proposed changes to
the GNC Charter provide that the GNC is to assist the Board in
overseeing OCC's corporate governance processes, including evaluating
candidates for Board service.
---------------------------------------------------------------------------
\50\ 17 CFR 240.17Ad-25(c).
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Membership and Organization
The SEC Governance Rules require a majority of directors serving on
the nominating committee be independent directors, and the chair of the
nominating committee be an independent director.\51\ To reflect this
requirement, OCC's proposed changes to the GNC Charter provide that at
least a majority of the Committee must be comprised of directors who
are independent directors, consistent with the Securities and Exchange
Commission Rule 17Ad-25(c)(2) and the judgment of the Board. OCC's
proposed changes also specify that the Chair must be a Public Director,
who is also an independent director as defined in accordance with
Securities and Exchange Commission Rule 17Ad-25(c)(2).\52\ OCC believes
these proposed changes align with the SEC Governance Rules requirements
related to composition requirements for a nominating committee.
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\51\ 17 CFR 240.17Ad-25(c)(2).
\52\ Id.
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Functions and Responsibilities
The SEC Governance Rules also contain several other requirements
related to the responsibilities of a nominating committee. These
requirements provide that: (i) the nominating committee must have a
written evaluation process that includes the evaluation of all
nominees, no matter the source of nomination, and an evaluation of all
nominees and directors regarding status as independent directors; \53\
and (ii) the nominating committee must document the outcome of its
written evaluation processes, including identification of whether each
nominee or director meets the definition of independent director, as
defined in the SEC Governance Rules.\54\ To align with these
responsibilities, OCC's proposed changes to the GNC Charter provide
that the GNC must maintain a written evaluation process, which will be
documented in meeting materials and minutes, to evaluate all nominees
for potential service as directors and evaluate the independence of
nominees and directors for consistency with regulatory requirements. As
part of OCC's written evaluation process that will be documented in
meeting materials and minutes, the GNC will review a packet of
materials that contains background information for all Board candidates
as well as any other documentation that describes other relevant
information and criteria for Board candidates. Additionally, OCC
maintains various written documents that would guide the GNC's
evaluation of director candidates (e.g., Fitness Standards, director
questionnaire). These documents provide the requirements for director
candidates and articulate what the GNC must consider when evaluating
prospective Board members. OCC's proposed changes also specify that the
outcome of the written evaluation process must be documented consistent
with applicable regulatory requirements. OCC's existing GNC Charter
provides that the GNC identifies, screens and reviews individuals
qualified to be elected or appointed as Member Directors or Public
Directors. The nomination of Exchange Directors is separately the
responsibility, under the By-Laws, of each OCC stockholder
exchange.\55\ To reflect the requirements outlined in the SEC
Governance Rules, OCC's proposed changes provide that the GNC must
identify, screen, and review individuals qualified to be elected or
appointed, as the case may be, to serve as Directors. Here, OCC's
proposed changes eliminate the specific terms ``Member Directors'' and
``Public Directors'' and generally use the term ``Directors'' because
the SEC Governance Rules require that the GNC perform the same
evaluation process for all nominees for potential service as directors.
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\53\ 17 CFR 240.17Ad-25(c)(1).
\54\ 17 CFR 240.17Ad-25(c)(4)(iv).
\55\ See supra note 4.
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An additional requirement of the nominating committee that is
outlined in the SEC Governance Rules is that the fitness standards for
serving as a director must be specified by the nominating committee,
documented in writing, and approved by the Board.\56\ Although OCC
already maintains fitness standards for directors, OCC's proposed
changes to the GNC Charter state that the GNC must specify fitness
standards for serving as a director that are documented in writing and
approved by the Board in order to comply with Rule 17Ad-25(c)(3).
---------------------------------------------------------------------------
\56\ 17 CFR 240.17Ad-25(c)(3).
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The SEC Governance Rules also require that the nominating committee
document the outcome of the written evaluation process consistent with
the fitness standards such that the process demonstrate that the
nominating committee considered the views of other stakeholders who may
be affected by the decisions of the registered clearing agency.\57\ To
align with this requirement, OCC's proposed changes in the GNC Charter
provide that the Committee shall, in its evaluation of nominees for
serving as directors, consider the views of other stakeholders who may
be affected by the decisions of the Board of Directors, other than
owners of the Corporation and Clearing Members.
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\57\ 17 CFR 240.17Ad-25(c)(4)(iii).
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To align with the process of evaluation for determining an
independent director as described by the SEC Governance Rules and the
requirement for the nominating committee to evaluate the independence
of nominees and directors,\58\ OCC's proposed changes provide that the
GNC must review and advise the Board with regard to whether directors
are independent directors in accordance with Securities and Exchange
Commission Rule 17Ad-25(c)(1).
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\58\ 17 CFR 240.17Ad-25(c)(1).
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OCC's GNC Charter provides that the GNC advises the Board with
respect to committee structure, operations and charters, including
recommending to the Board for its approval the appointment of directors
to Board committees and assignment of committee Chairs, in each case
after consultation with the Chairman. To incorporate the requirement
that the membership of each risk management committee be re-evaluated
annually as defined by 17Ad-25(d)(1),\59\ OCC's proposed changes to the
GNC Charter include the requirement that each
[[Page 86874]]
calendar year, the GNC must recommend to the Board for its approval the
appointment of directors to Board committees and assignment of
committee Chairs, in each case after consultation with the Chairman.
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\59\ 17 CFR 240.17Ad-25(d)(1).
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Proposed Changes to OCC's Risk Committee Charter
Membership and Organization
The SEC Governance Rules require, among other things, the
establishment of a risk management committee of the Board to assist the
Board in overseeing the risk management of the clearing agency.\60\ As
noted above, OCC already satisfies this requirement through the
maintenance of its Risk Committee of the Board. In the performance of
its duties, the SEC Governance Rules require the Risk Committee to be
able to provide a risk-based, independent, and informed opinion on all
matters presented to the committee for consideration in a manner that
supports the overall risk management, safety, and efficiency of the
registered clearing agency.\61\ To promote clear consistency with these
requirements, OCC's proposed changes to the Risk Committee Charter
provide that in making their nominations, the GNC and the Board take
into consideration the desire to obtain input from a broad array of
market participants on risk management issues and the ability of the
Committee to provide a risk-based, independent, and informed opinion on
all matters presented to it for consideration.
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\60\ 17 CFR 240.17Ad-25(d)(1).
\61\ 17 CFR 240.17Ad-25(d)(2).
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The SEC Governance Rules also require that any Board committee with
the authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself.\62\ Because
the Risk Committee, subject to the direction of the Board, is empowered
to act on behalf of the Board, with respect to any matter necessary or
appropriate to the accomplishment of the purpose and responsibilities
set forth in the Risk Committee Charter, OCC's proposed changes to the
Risk Committee Charter provide that at least a majority of the
Committee must be composed of directors who are independent directors,
consistent with Securities and Exchange Commission Rule 17Ad-25(e) and
the judgment of the Board.
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\62\ 17 CFR 240.17Ad-25(e).
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Functions and Responsibilities
The SEC Governance Rules require, among other things, that a
clearing agency address the management of risks from relationships with
service providers for core services, as defined by the SEC Governance
Rules.\63\ These requirements include that each registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to require senior
management to evaluate and document the risks related to an agreement
with a service provider for core services.\64\ OCC's existing Risk
Committee Charter provides that the Committee shall receive a quarterly
report from management that provides information on the effectiveness
of OCC's management of third-party risks, including key linked and
vendor relationships. To incorporate the SEC Governance Rules
requirements that senior management must evaluate and document the
risks related to an agreement with a service provider for core
services, OCC's proposed changes to the Risk Committee Charter provide
that the Committee shall also provide risk assessments to the Board for
any service providers providing core services to OCC, consistent with
the SEC Governance Rules.\65\
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\63\ 17 CFR 240.17Ad-25(i).
\64\ 17 CFR 240.17Ad-25(i)(1).
\65\ Id.
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Proposed Changes to OCC's Technology Committee Charter
Membership and Organization
The SEC Governance Rules require that any Board committee with the
authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself.\66\ Because
the Technology Committee, subject to the direction of the Board, is
empowered to act on behalf of the Board, with respect to any matter
necessary or appropriate to the accomplishment of the purpose and
responsibilities set forth in the Technology Committee Charter, OCC's
proposed changes to the Technology Committee Charter provide that at
least a majority of the Committee must be composed of directors who are
independent directors, consistent with the Securities and Exchange
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------
\66\ 17 CFR 240.17Ad-25(e).
---------------------------------------------------------------------------
Proposed Changes to OCC's CPC Charter
Membership and Organization
The SEC Governance Rules require that any Board committee with the
authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself.\67\ Because
the CPC, subject to the direction of the Board, is empowered to act on
behalf of the Board with respect to any matter necessary or appropriate
to the accomplishment of the purpose and responsibilities set forth in
the CPC Charter, OCC's proposed changes to the CPC Charter provide that
at least a majority of the Committee must be composed of directors who
are independent directors, consistent with Securities and Exchange
Commission Rule 17Ad-25(e) and the judgment of the Board.
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\67\ Id.
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Proposed Changes to OCC's CPC Charter Identified During OCC's Annual
Review Process
As part of OCC's annual review of the CPC Charter, OCC also
proposes to make updates to the CPC Charter to expand the description
of the role of the CPC as it relates to oversight of the development
and administration of OCC's Human Resources programs. OCC's proposed
changes provide that the CPC must oversee the development and
administration of OCC's Human Resources programs and policies,
including talent acquisition, compensation performance management,
diversity, equity, and inclusion programs, training and development,
benefits, and succession planning for critical roles. The purpose of
these proposed changes to the CPC Charter is to more closely align with
OCC's existing Human Resources programs and policies.
Proposed Changes to OCC's Regulatory Committee Charter
Membership and Organization
The SEC Governance Rules require that any Board committee with the
authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself.\68\ Because
the Regulatory Committee, subject to the direction of the Board, is
empowered to act on behalf of the Board, with respect to any matter
necessary or appropriate to the accomplishment of the purpose and
responsibilities set forth in the Regulatory Committee Charter, OCC's
proposed changes to the Regulatory Charter provide that at least a
majority of the Committee must be composed of directors who are
independent directors, consistent with Securities and Exchange
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------
\68\ 17 CFR 240.17Ad-25(e).
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[[Page 86875]]
Proposed Changes to OCC's Regulatory Committee Charter Identified
During OCC's Annual Review Process
As part of OCC's annual review process, OCC also proposes to make
one minor grammatical update to the Regulatory Committee Charter by
replacing the word ``in'' with the word ``is'' where needed in a
sentence under section II subpart B of the document.
Proposed Changes to OCC's Audit Committee Charter
Membership and Organization
The SEC Governance Rules require that any Board committee with the
authority to act on behalf of the Board must have at least the same
percentage of independent directors as the Board itself.\69\ Because
the Audit Committee, subject to the direction of the Board, is
empowered to act on behalf of the Board, with respect to any matter
necessary or appropriate to the accomplishment of the purpose and
responsibilities set forth in the Audit Committee Charter, OCC's
proposed changes to the Audit Committee Charter provide that at least a
majority of the Committee must be composed of directors who are
independent directors, consistent with Securities and Exchange
Commission Rule 17Ad-25(e) and the judgment of the Board.
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\69\ Id.
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Proposed Changes to OCC's Fitness Standards
Criteria Applicable to all Directors
As described above, OCC already maintains Fitness Standards for
directors. In addition to the requirement that the GNC specify the
Fitness Standards and that the Fitness Standards be approved by the
Board, the SEC Governance Rules also require that the GNC's written
evaluation process in regards to the Fitness Standards consider: (i)
the nominee's expertise, availability, and integrity, and demonstrate
that the Board, taken as a whole, has a diversity of skills, knowledge
experience and perspectives; (ii) the views of other stakeholders who
may be affected by OCC's decisions; and (iii) whether each nominee or
director would meet the definition of independent director in the SEC
Governance Rules and whether each nominee or director has a known
material relationship with OCC or other specified persons.\70\ To align
with these requirements more closely, OCC's proposed changes to the
Fitness Standards provide that in considering nominees for election or
appointment to the Board, the GNC must consider whether the individual
would help demonstrate that the Board, taken as a whole, has a
diversity of skills, knowledge, experience, and perspectives and
whether the individual understands and is able to consider the general
position and views of other stakeholders who may be affected by the
decisions of the Board of Directors, other than the owners of OCC and
Clearing Members.
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\70\ 17 CFR 240.17Ad-25(c)(4)(i), (iii), (iv).
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Proposed Changes to OCC's Fitness Standards Identified During OCC's
Annual Review Process
To incorporate the proposed changes identified during OCC's annual
review process as it relates to the description of a Public Director,
OCC also proposes changes to the criteria for Public Directors as
outlined in the Fitness Standards. To align with the proposed changes
in OCC's Board Charter and By-Laws, OCC's proposed changes to the
Fitness Standards remove language that states the director must not
have an affiliation with any national securities exchange, national
securities association, designated contract market, futures commission
merchant, or broker-dealer in securities, and replaces that with the
additional criterion that the director must not be an associated person
or employee of an: (i) entity that is registered or exempt from
registration with the Securities and Exchange Commission or Commodity
Futures Trading Commission; or (ii) affiliate of such an entity
described in (i). OCC's proposed changes also provide that for the
avoidance of doubt, this criterion will not preclude a person from
service as a Public Director solely based on some other relationship
with an entity described in (i) or (ii) above that does not involve
being an associated person or employee of the entity, such as might be
the case, depending on the circumstances, in connection with serving as
a director. OCC believes these proposed changes more closely align with
the requirements under the SEC Governance Rules.
Proposed Changes to OCC's Third-Party Risk Management Framework
The SEC Governance Rules require OCC to have written policies and
procedures designed to address certain aspects of risk management in
connection with relationships with service providers for core clearing
agency services and require senior management to be responsible for
establishing and the Board to be responsible for reviewing and
approving such policies and procedures.\71\ More specifically, the SEC
Governance Rules require, among other things, that senior management:
(i) evaluate and document risks related to an agreement with a service
provider for core services, as defined by the SEC Governance Rules;
(ii) submit to the Board for review and approval any agreement
establishing a relationship with a service provider for core services
along with a risk evaluation; (iii) be responsible for establishing the
policies and procedures that govern relationships and manage risks
related to such agreements with service providers for cores service and
require the Board to be responsible for review and approving such
policies and procedures; and (iv) perform ongoing monitoring of service
providers for core services and to report to the Board any action taken
by senior management to remedy significant deterioration in
performance, to address material issues, or to assess and document
deficiencies that cannot be remedied.\72\
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\71\ 17 CFR 240.17Ad-25(i).
\72\ 17 CFR 240.17Ad-25(i)(1)-(4).
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OCC's existing Third-Party Risk Management Framework already meets
certain requirements in the SEC Governance Rules.\73\ OCC's Third-Party
Risk Management Framework outlines OCC's approach to identify, measure,
monitor, and manage risks arising from third-party relationships
including, but not limited to, those relationships with Clearing
Members, Clearing Banks, custodians, liquidity providers, financial
institutions, financial market utilities, exchanges, and vendors. In
addition, OCC's Third-Party Risk Management Framework is reviewed and
approved by OCC's Risk Committee and Board pursuant to OCC's internal
policies and procedures.\74\
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\73\ 17 CFR 240.17Ad-25(i)(3).
\74\ OCC has included its Policy Governance Policy, which
requires Board review and approval of the Third-Party Risk
Management Framework, as confidential Exhibit 3G to File No SR-OCC-
2024-015.
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To incorporate the remaining requirements of the SEC Governance
Rules regarding review, approval, and monitoring of agreements with
service providers for core services, OCC proposes several updates to
section III of the Third-Party Risk Management Framework.\75\ First,
OCC's proposed changes revise the header in section III to include the
words ``Third-Party'' before ``Relationship Lifecycle'' to provide
further clarity and remain consistent with other headers throughout the
document.
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\75\ 17 CFR 240.17Ad-25(i).
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In addition, OCC's proposed changes to the Third-Party Risk
Management
[[Page 86876]]
Framework provide that certain third-parties may constitute service
providers for core services and are subject to enhanced lifecycle
management by OCC's management and Board. OCC's proposed changes
specify that this enhanced management applies at the initial on-
boarding stage and on an ongoing basis. Consistent with the
requirements in the SEC Governance Rules,\76\ OCC's proposed changes
provide that during the on-boarding stage and prior to entering into an
agreement with a service provider for core services, OCC's Management
Committee will evaluate and document the risks related to the
agreement, including under changes to circumstances and potential
disruptions, and assess whether the risks can be managed in a manner
consistent with the Third-Party Risk Management Framework (the ``Risk
Analysis''). OCC's proposed changes also clarify that prior to entering
agreements establishing a relationship with a service provider for core
services, OCC's Management Committee will submit the agreement, as well
as its Risk Analysis, to the Board for review and approval, in
compliance with the requirements in the SEC Governance Rules.\77\
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\76\ 17 CFR 240.17Ad-25(i)(1).
\77\ 17 CFR 240.17Ad-25(i)(2).
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Furthermore, OCC's proposed changes state that service providers
for core services will be monitored on an ongoing basis. OCC's proposed
changes provide that OCC's Management Committee evaluates performance
of service providers for core services and either: (i) remedies
significant deterioration in performance of the service provider for
core services; (ii) addresses changing risks or material issues with
the service provider for core services identified through such
monitoring; or (iii) if such risks or material issues cannot be
remedied, assesses and documents weaknesses or deficiencies with the
service provider for core services. In addition, OCC's proposed changes
provide that OCC's Management Committee will report to the Board for
its evaluation any action taken by the Management Committee to remedy
significant deterioration in performance of the service provider for
core services or address changing risks or material issues with the
service provider for core services. OCC's proposed changes will clarify
that if the risks or issues with the service provider for core services
cannot be remedied, OCC's Management Committee will assess and document
the weaknesses and deficiencies and submit to the Board the documented
weaknesses or deficiencies in the relationship with the service
provider for core services.
OCC's existing Third-Party Risk Management Framework states that
risks identified throughout the relationship lifecycle are reported and
escalated through associated working groups. OCC's proposed changes
provide that each working group has a chair and designated Management
Committee member who are responsible for identifying the matters to be
escalated to the Management Committee, ``in accordance with this
Framework.'' By including the reference ``in accordance with this
Framework,'' OCC believes this language aligns more closely with the
requirements in the SEC Governance Rules.\78\
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\78\ 17 CFR 240.17Ad-25(i)(1).
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To align with the defined terms in the SEC Governance Rules,\79\
OCC's proposed changes to the Third-Party Risk Management Framework
include the definition of ``Service Provider for Core Services.'' OCC's
proposed changes define service provider for core services as any
person that, through a written services provider agreement for services
provided to or on behalf of OCC, on an ongoing basis, directly supports
the delivery of clearance or settlement functionality or any other
purposes material to the business of OCC. OCC believes these proposed
changes to the Third-Party Risk Management Framework satisfy the
requirements outlined in the SEC Governance Rules.\80\
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\79\ 17 CFR 240.17Ad-25(a).
\80\ 17 CFR 240.17Ad-25(i).
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Proposed Changes to OCC's Third Party-Risk Management Framework
Identified During OCC's Annual Review Process
OCC also proposes to incorporate additional edits to the Third-
Party Risk Management Framework, as outlined below, to reflect the
proposed changes determined through OCC's annual review process.
Under section I, Executive Summary, OCC proposes to expand the
description of risks arising from ``Exchanges'' to risks arising from
``Exchange Relationships.'' This proposed change, which is also
reflected in section IV, Third-Party Relationship Management, and
throughout the remainder of the document, encompasses risks arising
from third-party relationships including options exchanges, futures
markets, OTC trade sources or loan markets. OCC believes this proposed
change more clearly describes the current risk management activities
related to third-party relationships including exchanges and those
relationships that are not registered exchanges. OCC's proposed changes
also relocate the definition of Exchange Relationships from footnote 2
to section V, Definitions, to promote clarity and consistency
throughout the document.
Under section II, Risk Identification, OCC proposes to expand the
description of (i) Information Technology and Security risks and (ii)
Legal and Regulatory risks. For Information Technology and Security
risks, the current description acknowledges that risks arise when
third-parties are unable to safeguard OCC data or maintain capabilities
to support OCC's operations. While the current description is accurate,
it does not encompass the full scope of the current third-parties'
obligations required by OCC. OCC proposes to include that Information
Technology and Security risks also arise when third-parties are unable
to safeguard OCC's systems, in addition to OCC data. OCC also proposes
to incorporate the language ``in accordance with OCC's service
standards'' into the description to clearly outline the enforcement of
responsibilities. OCC believes this change will better define
Information Technology and Security risks from relationships with
third-parties related to OCC. For Legal and Regulatory risks, OCC's
proposed changes provide that Legal and Regulatory risks arise when a
third-party fails to fulfill its obligations to OCC or when OCC fails
to fulfill its obligations to a third-party. OCC's proposed changes
provide that Legal and Regulatory risks also arise when a third-party
fails to comply with regulatory standards and protocols agreed to with
OCC. OCC believes these proposed changes more clearly define Legal and
Regulatory risks that arise from relationships with third-parties. OCC
also proposes to make minor, non-substantive changes to section II,
such as decapitalizing the words ``clearing fund'' when needed.
Under section III, Relationship Lifecycle, OCC proposes to revise
specific language related to off-boarding of third-parties. The off-
boarding section currently provides that OCC finalizes its third-party
relationship lifecycle by completing ``any operational tasks necessary
to off-board the relationship.'' OCC proposes to include the language
``in compliance with agreement terms'' to clarify current risk
management expectations and responsibilities relating to third-party
off-boarding. This revision would be consistent with OCC's current
operations and off-boarding processes. OCC also proposes to make
several minor, non-substantive changes to this section, including
[[Page 86877]]
changing language from ``determination to terminate'' to ``termination
of,'' and replacing the word ``relationship'' with ``engagement'' when
describing third-party arrangements with OCC to promote additional
clarity. In addition, to provide additional clarity, OCC proposes to
replace the word ``defined'' with ``specified'' when explaining the
decision-making authority, functions and responsibilities in the
working group procedure.
Under section IV, Third-Party Relationship Management, OCC proposes
to revise the header from ``Exchanges'' to ``Exchange Relationships''
to reflect the proposed changes in section I. OCC's proposed changes
update the On-Boarding section under ``Exchange Relationships'' by
revising the distribution methods of the summary activities of exchange
relationship. The current description states that summaries of due
diligence and on-boarding activities are presented to the Board of
Directors for approval to launch. OCC proposes to clarify the reporting
requirements by specifying where they should be reported. OCC's
proposed changes would direct the reporting of due diligence and on-
boarding activities to the Management Committee. Further, the proposed
revisions would direct summaries of legal documents and requirements to
the Board of Directors. These proposed revisions would update and
clarify the description of OCC's current approach to on-boarding third-
parties without impacting current OCC operations. Also under section
IV, Third-Party Relationship Management, OCC proposes to make changes
to the Ongoing Monitoring sub-section by removing reference of legal
risk related to Exchange Relationships, and including the language
``and escalate identified legal risks to OCC's Legal Department.'' This
proposed change clarifies the responsibilities of OCC's business
operations and TPRM teams. Legal risks related to Exchange
Relationships are monitored by OCC legal, but if legal risks are
identified by business operations or TPRM during the ongoing monitoring
process, these legal risks should be escalated. OCC believes the
proposed change will better describe current risk management activities
related to ongoing monitoring of third-party relationships with
exchanges. OCC also proposes to update language in the Off-Boarding
sub-section by eliminating the specific language that states ``such as
limiting connectivity with the Exchange'' when referencing the
immediate actions OCC can take upon the termination of an Exchange
Relationship. OCC proposes to remove this language to provide further
clarification that limiting connectivity with an Exchange is not
specific only to off-boarding situations; OCC's action of limiting
connectivity with an Exchange can occur in other situations as well.
OCC believes the elimination of this language better aligns with OCC's
overall responsibility related to off-boarding and provides for greater
flexibility related to OCC's immediate actions. Finally, OCC proposes
several non-substantive, grammatical changes to the Ongoing Monitoring
sub-section such as replacing the word ``communicate'' with
``communication of'' and ``seek'' with ``solicitation of.''
Also under section IV, Third-Party Relationship Management, OCC
proposes to make changes to the Vendors sub-section of the document.
OCC's proposed changes provide that prior to commencing on-boarding of
a new technology vendor, implementing new capabilities, or services to
existing technology, Information Technology reviews the request to
identify solutions and analyze requirements to verify that they are in
line with enterprise strategic requirements. OCC believes these
proposed changes more clearly assign ownership and accountability for
expectations around risk management for new vendors throughout OCC. In
addition, in the On-Boarding section under Vendors, OCC's proposed
changes state that an agreement that addresses control and business
requirements is then negotiated with the vendor and executed by
authorized signatories designated through the process outlined in the
Legal Services Policy. OCC's proposed changes revise the language that
``authorized signatories'' rather than an ``OCC officer'' will be
responsible for executing agreements that address control and business
requirements. OCC believes the revised text more closely aligns with
current practices. Furthermore, this revision would encourage OCC's
longstanding practices to update internal policies, directing staff
towards correct procedures and personnel requirements.
OCC's Third-Party Risk Management Framework also states that vendor
relationship managers (``VRMs'') and Third-Party Risk Management
(``TPRM'') monitor vendors to assess whether they are delivering
services as required by applicable agreements. To align with current
OCC business practice and promote clear accountability, OCC's proposed
changes eliminate reference to ``TPRM'' because it is the VRMs who are
responsible for monitoring vendors, while TPRM gathers information and
escalates if necessary.
Under section V, Definitions, OCC's proposed changes in the Watch
Level section include the addition of ``risk management'' in its list
of deteriorations which signal a risk response. OCC believes this
revision would better describe the current risk management methods
related to watch level monitoring and would not substantively alter
existing processes.
Lastly, OCC's proposed changes to the Third-Party Risk Management
Framework reflect the name change as a result of the combination of two
working groups. OCC's Exchange Working Group and Vendor Risk Working
Group will be combined to form the Exchange and Vendor Working Group,
therefore OCC's proposed changes throughout the Third-Party Risk
Management Framework reflect the merger of these two groups. OCC's
proposed changes also reflect the change in the acronym of the new
combined working group's name.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act.\81\ Section 17A(b)(3)(F) of the Act \82\
requires, among other things, that the rules of a clearing agency must
be designed to promote the prompt and accurate clearance and settlement
of securities transactions, safeguard securities and funds in its
custody or control or for which it is responsible, and to foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions.\83\ OCC believes that the
proposed rule changes are consistent with these requirements because
the proposed changes are designed to, among other things, modify OCC's
governance documents such that: (i) OCC's Board and Board-level
committees are composed of independent directors, as defined by the SEC
Governance Rules, (ii) OCC's policies and procedures identify, mitigate
or eliminate and document the identification, mitigation, or
elimination of conflicts of interest, and (iii) OCC's policies and
procedures address certain aspects of risk management in connection
with relationships with service providers for core clearing agency
services.
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\81\ 15 U.S.C. 78q-1.
\82\ 15 U.S.C. 78q-1(b)(3)(F).
\83\ Id.
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OCC believes the proposed changes to incorporate the independent
director requirement help to promote the ability of the Board to
perform its oversight of
[[Page 86878]]
management function, support a plurality of viewpoints voiced at the
Board level, ensure a balance between stakeholders with divergent
views, and reduce the likelihood that conflicts of interest may
influence the Board. OCC believes that establishing requirements that
the Board be comprised of a majority of directors who do not have a
material relationship with the registered clearing agency or affiliate
thereof helps to promote the integrity of OCC's risk management
function, and therefore helps to promote prompt and accurate clearance
and settlement of securities transactions and safeguard the securities
and funds which are in the custody or control of OCC or for which OCC
is responsible, consistent with Section 17A(b)(3)(F).
OCC believes the proposed changes regarding the Board's oversight
role of senior management as it relates to management of risks from
relationships with service providers for core services also help to
promote the prompt and accurate clearance and settlement of securities
transactions and safeguard securities and funds in its custody or
control or for which OCC is responsible, consistent with Section
17A(b)(3)(F). The potential failure of a service provider for core
services to perform its obligations could pose a significant
operational risk to OCC and impact the ability for OCC to facilitate
prompt and accurate clearance and settlement. Therefore, by requiring
that senior management establish policies and procedures that govern
relationships with service providers for core services, manage risks
related to those relationships, and perform ongoing monitoring of those
relationships, OCC believes these proposed changes help to promote the
prompt and accurate clearance and settlement of securities transactions
and safeguard securities and funds which are in the custody or control
of OCC or for which OCC is responsible, consistent with Section
17A(b)(3)(F).
OCC's proposed changes to its governance documents establish
policies and procedures to identify, mitigate or eliminate and document
the identification, mitigation, or elimination of conflicts of interest
in the decision-making process involving directors or senior managers
of OCC. OCC believes these proposed changes assist in promoting the
integrity of OCC's governance arrangements by helping to ensure that
potential conflicts of interests are identified when they arise, and
that such conflicts are subject to a transparent and uniform process of
review, mitigation or elimination and documentation. By incorporating
the proposed changes intended to address conflicts of interest related
to directors and senior managers, OCC believes this will help to reduce
conflicts that could undermine the decision-making process or interfere
with fair representation and equitable treatment of clearing members or
market participants. Therefore, OCC believes the proposed changes help
to foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F).
Finally, OCC also believes the proposed changes are consistent with
Rule 17Ad-22(e)(2). Rule 17Ad-22(e)(2) requires OCC to, among other
things, provide for governance arrangements that are clear and
transparent, establish that the board of directors and senior
management have appropriate experience and skills to discharge their
duties and responsibilities, and specify clear and direct lines of
responsibility.\84\ Modifying OCC's governance documents through the
proposed changes described in Item III above would be consistent with
these requirements because the changes would document in a clear,
direct, and transparent way the independent director composition of the
Board and Board-level committees, the responsibilities of the Board and
Board-level committees as it relates to management of conflicts of
interest, Board oversight, and management of risks for service
providers for core services. In addition, OCC's proposed changes
clearly specify the Fitness Standards for serving as a director and the
criteria applicable to all directors, which includes the consideration
of whether the director nominee would help demonstrate that the Board,
taken as a whole, has a diversity of skills, knowledge, experience and
perspectives consistent with Rule 17Ad-22(e)(2)(iv).
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\84\ 17 CFR 240.17Ad-22(e)(2)(i),(iv),(v).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \85\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule changes to modify OCC's governance
documents would impact or impose any burden on competition. The
proposed changes would promote OCC's compliance with the SEC Governance
Rules that OCC must comply with by December 5, 2024 and December 5,
2025. The proposed changes to OCC's governance documents are designed
to clearly articulate the newly established requirements of the SEC
Governance Rules including, but not limited to, the Board and committee
composition, independent directors, management of conflicts of
interest, board oversight, and management of risks from relationships
with service providers for core services. The proposed changes to OCC's
governance documents also aim to, among other things, increase
transparency into board governance and improve the alignment of
incentives among owners and participants of OCC by ensuring that a
majority of Board members and Board-level committee members be
independent directors, as defined by the SEC Governance Rules, and that
functions and responsibilities of the Board and Board-level committees
are clearly outlined. In addition, the proposed changes to OCC's
governance documents help to reduce the likelihood that conflicts of
interest may influence the Board. These changes to OCC's governance
documents would apply to all Equity Exchanges and Clearing Members
equally and would not disadvantage or favor any particular user in
relation to another user. Therefore, OCC believes that the proposed
changes would not impose any burden on competition.
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\85\ 15 U.S.C. 78q-(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the selfregulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
[[Page 86879]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking);
or
Send an email to [email protected]. Please include
file number SR-OCC-2024-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2024-015. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of OCC and on OCC's
website at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2024-015 and should
be submitted on or before November 21, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
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\86\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-25322 Filed 10-30-24; 8:45 am]
BILLING CODE 8011-01-P